Harvesting 'Crisis Alpha’

seven percent this year. She'll explain what crisis alpha actually is and how to capture it in times like these, and as always, we will close out the episode with our tradition the craziest thing I saw in markets this week? Uh, And please do if you see something crazy and markets, give us a call on the podcast hotline at six four six four three four nine oh or tweet to us at Podcasts and let us know the craziest thing you saw and maybe we'll play your voicemail or mention

your tweet on the air. Well, let's introduce a new voice here, first time on the show. Very excited to have her. As sorry, as you pointed out, she is an expert in trend following UH using managed futures, in fact, wrote the book on it, or at least co wrote the book Trend Following with Managed Futures, The Search for Crisis Alpha. She is the chief research strategist at Alpha Simplex Group. UH, teaches at m I T in her spare time, and very excited to get her take on

these markets. Her name is Katie Kaminsky. Katie, Welcome to the show. Hi, nice to be here today. I wanted to ask about sort of how the trend following, especially UH. I believe it's the Alpha Simplex Managed Future strategy that Sarah was referring to. It's up like about seven or

eight percent this year. UM. I was reading a note you wrote about sort of the process of trend following during this bear market in stocks that we've seen this year, and I guess you wrote a little bit about how the signals, the cross assets signals from say the bond market and the and the commodities market copper and oil especially, UM, we're sort of signaling a risk off environment a lot earlier than stocks, at least before stocks peaked towards the

end of February there. But I'm just curious how it all sort of fits together, if you could kind of dissect for us the returns and that fund how it's able to do so well in this type of environment. So the concept of crisis alpha opportunities are opportunities game during periods of market stress or crisis. Um Strategies like trend following are specifically designed to constantly measure where markets are going and how things are changing across a wide

range of methodologies. And what we find is that we move as the markets move, So as markets move in different directions, we're constantly adjusting and following where markets go. And so in the moments when there's a lot of uncertainty or there's a lot of stress in the markets, it turns out that people tend to be much more polarized in their actions, for both either behavioral reasons or for the fact that they may be driven into action

based on risk management and other typical institutional protocols. So the key thing that we are following, and what's different about us is that we're much more technical in nature, and that we're actually looking at where the market's going as opposed to why it's going somewhere, And that means that we're listening to the markets and seeing where they

are pointing. So if I think about what happened earlier this year, especially January, what was very ominous to me and was giving a little pause was just how are trend fling signals and how trend fling in general started to see a growing apprehension, not in the equity markets, but more so in the other periphery markets, which were starting to price in some of the uncertainty and some

of the potential UH impacts of a potential pandemic. So, speaking of this apprehension, Katie, the last time I saw you was early March. It seems like a lifetime ago because we were actually face to face in person. Doesn't happen anymore. I believe it was on on March six. Then. At the time, the SMP had fallen twelve percent, and little did anyone know that from that point we still had roughly or more to go. We would also all be entering stay at home orders. Businesses would be shutting.

And at the time you expressed that apprehension, and around the same period you also authored a report and within it you said the market smells as skunk, precisely for those reasons that other asset classes were signaling caution and and it makes me think, I mean, if the market quote unquote smelled the skunk, then well then what does it smell now, because I mean, you look at oil prices this past week, which dropped below twenty a barrel for w t I again, and at the same time,

we haven't really seen bond prices react all that much. But meanwhile, we've just seen equity markets turn around to the upside pretty forcefully, exactly. And what's interesting for us is that we saw tremendous trends in the cross asset space. So there were tremendous opportunities in fixed income UM, short energies,

short industrial metals, long precious metals. UH. The currency market has been a little bit more of it back and forth in all of this situation, but in general, the trends that we were seeing were relatively strong, much stronger than the typical amount of trend that you would see

UM in a time where people are not concerned. And this is why these strategies actually do very well in these environments is that during periods of fear or distress, people are much more coordinated and how they behave and prices as a result, can also move in a much more coordinated way, which means that a particular strategy that's actually measuring and monitoring these trends can actually capture them.

So I often think about our positioning as an aggregate estimate or view of what the market thinks, where the market's going. So if I take a look back in January at the beginning of this what was concerning to me is I saw a lot of strength in terms of a lot of bullish signals for fixed income, you know, kind of in some sense hesitation about the equity markets.

I also saw a lot of strength in terms of short positions in things like energies, and as you know, oftentimes energies fall with equities but don't recover as much um And so we saw all of these type of signs and strengthening, especially in flight to safety trades in terms of the cross assets that we monitor, which was indicative that half of the things we were looking at we're looking a little ominous. And the equity markets were yet to fall Asian markets were a little bit weaker.

But as we saw markets fall out in February into March, then the theme became coordinated and it was very much a a theme of crisis. And since that point we saw that continue throughout March. Um our signals have gone from being very cautiously optimistic about equities to cautiously pessimistic.

Um not in size, but definitely right now the way we're thinking about things, because you asked about positioning, UM, if I take a look at how trends signals are looking right now, there's definitely a very cautious view on equities, cautious and slightly negative. Yeah. I'm sure everyone right now

is having to make very difficult decisions. And when you say that the stands currently, at least regarding equities is cautiously pessimistic, can you maybe walk us through the evolution of the strategy maybe from the end of January to the point at which we get to this point now where we've had a nice rebound off of the lows and the strategy is pessimistic. I know it changes quite often, but can you maybe give us a sense of how the strategy did change throughout time as markets were moving

up until this point. Yeah, I will run through how the strategy had moved, But then at the end I'll maybe give some um overall view in terms of what could be driving this UM. So we'll start with at the beginning of the year. UM. It was quite interesting because after a year that was so phenomenally good for the equity markets last year, things were looking good. Bond markets had been more range bound and reverted somewhat in December, so it was really looking like a very pro equity

market environment. UM. I know, growth estimates were a little bit more muted than the priory prior year, but in general, the risk on theme had grown a lot, and we've seen that in em currencies, we've seen that in equities. But then later in the month and around mid month in January, as people started to notice some of the things that we're going on in Asia, we noticed that our potential signals in fixed income started actually to tick up,

our short view on energy started to grow. And then as we had sort of an initial hiccup at the end of January, we started to pick up some potential concern um, not in US equity markets, but in some of the cross asset markets. And what was interesting is that you start to get to a position which looked very hedged, so it was long equities, long fixed income, short energy. Now, if you think about that, that's really

a hedged position. It's almost like a no position in the sense that you're kind of if equities go down, you have things that might go up UM in terms of your positioning. So that continued in through the month of February. So February nineteen was the peak before the great fall. And what's been interesting about that is that all of the other signals that we were seeing and other asset classes just extended during these periods of time. So the short energy trade grew strength. We also saw

a fixed income positively responding to that. So for us, it was really about UM, a somewhat hedged position. So Trent following an average was roughly flat for the month of February, which I think is relatively spectacular given the

type of moves that we saw. Then in March, as we were seeing this move continue, we we're getting out of equity markets and trend failing signals were reducing exposure to equities down to an almost neutral to very low position, and we saw continued gains in fixed income and as well as commodity markets. Okayny I love if you could sort of explain for us some of the signals that define a trend uh in your strategies. Um, you know, is it as simple as something like a moving average? Uh?

You know, I imagine there's a lot of complex math involved. But what are some of the sort of cornerstones of identifying a trend that the strategy uses. So the key approach to trend falling is about taking many different technical methodologies and using those to create some sort of score or vote in terms of the direction of an individual market.

So this requires you to parameterize how much data you're going to use and what methodology you're going to use in terms of measuring the strength of that particular trend. What we tend to do, and what many in the space tend to do, is we use a wide range of different methodologies, some using more technical simple terms like moving averages and breakout signals, and others too as complicated as drawing from the machine learning literature and trying to

do things a little bit more nonlinearly. So overall, I tend to explain a trend filling system is really similar to a voting system. You have many different models with different time horizons in terms of how much data they're using, and they all come together an aggregate to vote on

where the market is going. So if you think about what we're really trying to do, we're taking in all this data from the markets would as you know, if you look at a week, and you look at a month, and you look at a year, they can look very different. Try to use mathematical techniques to measure those and then aggregate them together. Let those approaches vote to create an

overall signal. What this means is that in aggregate we are trying to measure all the information and bring it together to give ourselves an overall view of where the market's going. Because trend falling is really just momentum trading across different assets. You're following where things are moving, and

you're adjusting as the world changes. Whenever there is a heightened state of volatility in the market, UM, there's this tendency for analysts or or market pundits who can't really explain what's going on, to sort of point the finger at the machines running quant strategies. Uh. You know, if if not trend following, then uh, volatility targeting and UM even risk parity that sort of thing, And you know

that it's kind of an easy scapegoat. I guess for for some people to say, you know, this market doesn't make any sense to anyone but a machine running the strategy and the application. A lot of times is that UM uh quant strategies tend to do the same type of thing you're talking about, UH, all sort of reacting maybe racking to different signals, but the end result being to sell or buy all at the same time and possibly exaggerate the moves in the market. UM. Does do

you think that really happens in general? Uh? And specifically? And and say the volatility we've seen the last couple of months, UM or is it just impossible to know and sort of impossible to dice sacked what is causing massive swings like that? I always see and and I think it's an easy narrative to say that, because it's easier to blame a machine than a person. UM. But one other thing is is that I always go back

to the basic tenants of volatility. Volatility represents uncertainty. When things go up and down a lot, it's because people, whether or not it's algorithm or a person, I don't know what's going on, and they're unsure about where the markets are going, and I would say that across the quant space it's actually been very mixed. Trend Falling strategies are one of the only strategies that have really tend

to do very well in this environment. It actually turns out that a lot of the other quant strategies have struggled UM. The reason being is that they may have very specific hedges or offsets and in strategies that when things get volatile, things get complicated for them. UM. And so I would say that I tend to think about volatility is really our perception or it's a measurement of

our view of uncertainty. So the environment that we just went into, and you can probably you probably agree with me yourself, is that the idea of a pandemic, the idea of staying at home, the idea of a lockdown UM is something so uncertain that it is not at all surprising to me that markets would be up and down every other day. Because volatility is a measure of uncertainty things going around UM A lot is much more

about how we feel about what things, what things are worth. UM. Now could UH systematic managers or quad managers when people do the same thing move these things more, it's possible. I'd have to do a much more extensive research and really get into the data. I know that even when we looked at the flash crash, I know the CFTC did some extensive analysis of that and found actually that it was a fundamental trade that was just too large that created a dislocation. So I think I think that's

a great question. It's definitely a good narrative. People like it blame the machine, um, But for me, it's really this volatility isn't someone's fault. It's more that we don't know. It's really representative of how unsure the markets are about what's going on. No, there's no doubt that headlines news

flow has been on hyper drive. It scenes and Mike, you know that that has given us plenty of opportunities at least to uh think of crazy things for our crazy things and markets for sure, So what did what's

your best? What has been shocking to me has been the contango in oil that we have seen the fact that may oil pray says we're nineteen and September thirty something, and I saw a report from Bloomberg today that people, um, so going back to what we saw bonds in the summer where people are willing to pay to own German debt. Now we have a situation where you get paid to

sell gasoline, So maybe that's the next thing. We all go around and find gasoline and sell it, because, um, that's a weird world that you could get paid to actually sell gasoline. There must be just oil tigers crowded off the shores right now full of oil. It's it's an amazing Uh, that is an amazing situation. Apparently they said it was twelve cents a gallon in in North Dakota for oil. Well that's a good one, Katie, and you get you get props for sticking close to the markets, Sara,

can you top Katie's oil can tango? So I brought to one that's markets related and one that's less so so, but I'll start with the market related one and that's that. Now the five largest companies make up which is a new record. And I think it's just been pretty amazing that we continue to see a lot of these mega cap technology and internet companies just continue to perform so well in this type of environment. I think like a couple of years ago, people would have said that when

the bull market came to an end. The companies that let on the way up, we're going to lead on the way down and that and that certainly hasn't happened. Um. So I think the fact that we have a new record related to top heaviness in the market is pretty crazy. For one, Yeah, absolutely absolutely, and then uh, the less markets related one really not related to the markets at all. There was just a great story in the New York Times.

It was a bit uh, someone would say humorous. Um, but the headline reads Trump wanted a radio show, but he didn't want to compete with them, and it's it's a great read if you have some downtime. Essentially, it's just details President Trump going to one of the Coronavirus Task Force meetings and laying out this plan that he wanted to have a two hour radio show each day. Um. And the only reason he didn't want to do it is because he didn't want to knock Rush Limbaugh's ratings. Um.

It's it's an interesting rate. Uh, it's just a bit humorous in these In these times, he has a two hour TV show every night at the at the press count right now, he has a TV show instead with with great ratings so crazy times. I'm not sure how two hours on the radio helps him fight the virus, but he does like to talk, so UM, I have no no doubt he could fill two hours or radio time a day. All right, these are all pretty good.

I will I'll give you mine, um mine. As you know, I like to push the boundaries of what is considered a market story. Uh, but this is certainly crazy now. One of the most depressing things about this virus, uh for the average person who hasn't really had to deal with with a sick or dying relative, but the lack of sports on TV uh throughout this has been traumatic for a lot of people, um, especially gamblers. And here's

where we get into the markets. Now that online gambling is legal in some states, I I think it's okay to consider that an official market, at least for the purposes of this crea before. Yeah, at least for the purposes of this this crazy observation. So the first major league sport to get back in business, do you know what it is? Well, not counting world wide wrestling. Uh, that's what I was gonna say. W w Okay, I guess that might be there might be a tie between that,

but you can't. You can't gamble on that. I mean, I guess you could. But if you're gonna gamble on professional professional wrestling, then you've got goods of major problems. But I believe if you have inside information, right, yeah, but those are all plans anyways, right, they're all chograph's bet on the good guy. I guess um. They're is a league called the Major League Eating League, and it's these guys you know, like at the hot dog eating

contests on Conan Island. It's all those guys. Uh. It's been officially turned into a league called Major League Eating and they believe they are the first professional sport to get back in business. They're having eating tournament. Everyone's gonna be at their home zooming in or or skyping in. I guess uh. And you'll be able to gamble on it. They've already set some of the over unders and stuff like that on it. Let me just tell you what you have to do to to participate in this tournament.

So the qualifying round will consist of two pounds of slice bologney. So you have the two pounds of slice bologney, and it's a race. So who can eat that two pounds of blowney. The fastest I've read somewhere the overunder was like sixty nine seconds three to eat two pounds of blaney. So um, So, Mike, you're not you're not going to try to take part of Maybe if it was I don't know about bolony the quarter finals hot dogs, I could I don't know, I could kind of see that.

If it was chicken wings, maybe I I could get into that. I'm from Philly, where the the big competition is the chicken chicken wing eating competitions. But so then from the quarterfinals, uh, you'll have to eat a family sized pack of oreos and a half a gallon of milk. That doesn't seem that tough actually, but here's where, yeah, here's where they really will separate the pros from the amateurs. Though. Uh. To make it to the finals, you'll have to eat

over a gallon of baked beans. Oh and if you win that, the the finals consists of ten individual cups of ramen noodles. Um. But I think that gun. I wonder who comes up with this stuff beans and ramen? What are they assuming more people have these things at their home. I wonder if that's it. Yeah. Yeah, Oreos the gaunt of baked beans, I think is the deal breaker there. I don't, I don't know, I I I pity the person who gets that far. It's a hard one. I must say. I haven't been dragged into eating a

food watching it. But I've been watching um the horse tournaments for the NBA and the w n b A and also i've been watching some NBA players playing two K on Xbox, which has been a pretty entertaining and this time. Yeah, yeah, that's that's not bad. Let's say, Hey, it beats beats watching a rerun of a game. Anyway, Katie, maybe you could get your pals and m I t you could have like a New England clam chowder eating competition. Why not? I think I think it's probably hard to

get ahold of some fresh clam chowder around here. I don't know. Maybe there's a delivery service to check if legal, right, Uh, all right, well do what you gotta do in these times. But on that note, anyways, Katie Kaminski, thank you so much for joining the show this week. Thank you so much for having me. What goes up? We'll be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts.

We'd love it if you took the time to rate interview the show on Apple podcast so more listeners can find us, and you can find us on Twitter, follow me at at Sarah Panzac, Mike is that Reaganonymous, and you can also follow Bloomberg Podcasts at podcasts. What Goes Up is produced by Toper Foreheads. The head of Bloomberg Podcast is Francesca Levie. Thanks for listening, See you next time. Before